Question

Jurassic Company purchased equipment for $900,000 on June 1 2019. DDB method is used, based on a 5-year life and $1,000 salvage value. At the end of 2020, Jurassic found that the expected future net cash flows from the use of the assets are expected to be $410,000. The fair value of the equipment is $380,000. Is this equipment impaired? If the answer is yes, prepare the journal entry to record the impairment loss.

Answer 1

Answer :

Journal entry :-

Date	General journal	Debit	Credit
31-dec-2020	impairment loss	$4,000
	Equipment		$4,000
31-dec-2020	P or L	$4,000
	Impairment loss		$4,000

Explanation :

Impairment loss =Recoverable Value- Carrying Amount

Recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

If recoverable amount is more than carrying amount of an asset, then no impairment loss will be recognized.

1)Recoverable amount shall be higher of the following:

i)Fair Value less cost of disposal
ii)Value in use

In detail :

i)Fair Value less cost of disposal is:
Costs of disposal are deducted while determining the fair value less cost of disposal.

ii)Value in use :

It shall be calculated on the following basis:

Estimated Future Cash Flow
Discount rate.

2) carrying amount : it is carrying amount of an asset appearing as on end of year 2020 or on the date of impairment.

Calculation of depreciation and carrying amount under double declining method :

Following are the Steps involved in the calculation of depreciation expense using Double declining method :

1. Determine the initial cost of the asset at the time of purchasing.

2. Determine the salvage value of the asset i.e. the value at which the asset can be sold or disposed of after its useful life is over.

3. Determine the useful or functional life of the asset.

4. Calculate depreciation rate i.e. 1/useful life.

5. Multiply the beginning period book value by twice the depreciation rate to find the depreciation expense.

6. Deduct the depreciation expense from the beginning value to calculate the ending period value.

Therefore by appling the above steps:

Cost of the asset = $ 9,00,000

Salvage Value = $ 1,000

The useful life of the asset = 5 years

Depreciation rate = 1/useful life X 100= (1/5) X 100 = 20%

Double-declining balance formula = 2 X Cost of the asset X Depreciation rate.

Depreciation on 31-dec-2019 (for 7 months only i.e., from june 1 to 31 dec 2019)

= (2 X $9,00,000 X 20%)×7÷12

= $ 2,10,000

Carrying amount on 31-Dec- 2019 = $ 9,00,000 - $2,10,000

= $6,90,000

Depreciation on 31-dec-2020 (for 12 months)

= (2 X $6,90,000 X 20%)×12÷12

= $ 2,76,000

Carrying amount on 31-Dec- 2020 = $ 6,90,000 - $2,76,000

= $4,14,000

Therefore,

Impairment loss =Recoverable Value- Carrying Amount

Step 1

Recoverable amount shall be higher of the following:

i)Fair Value less cost of disposal
ii)Value in use

Given i) fair value = $3,80,000

ii) value in use (expected future cash flows) = $4,10,000

Therefore, recoverable amount is higher of above i) & ii)

i.e., $ 4,10,00

Step 2

Carrying amount as on year end 2020 = $ 4,14,000

Step 3

Impairment loss = $4,10,000 - $4,14,000 = ($4,000)

Journal entry :

Date	General journal	Debit	Credit
31-dec-2020	impairment loss	$4,000
	Equipment		$4,000
31-dec-2020	P or L	$4,000
	Impairment loss		$4,000